Franklin Utilities Fund Advisor Class

Transcription

1 Utilities Equity Product Profile Product Details 1 Fund Assets $5,726,572, Fund Inception Date 09/30/1948 Number of Issuers 45 NASDAQ Symbol FRUAX Maximum Sales Charge Investment Style Benchmark Lipper Classification Morningstar Category Dividend Frequency Asset Allocation 2 Percent of Total Equity Utilities S&P 500 Index Utility Funds Utilities Quarterly in March, June, September and December Fund Description The fund seeks capital appreciation and current income by investing predominantly in the securities of public utility companies, with a focus on companies operating in the US electricity and gas sectors. Performance Data 3,4 Average Annual Total Returns 5 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (09/30/1948) Advisor Class S&P 500 Utilities Index S&P 500 Index % 20% 0% -20% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Cash & Cash Equivalents Fixed Income % 25% 50% 75% 100% 125% Advisor Class S&P 500 Index Total Annual Operating Expenses: 0.58% 30-Day Standardized Yield 6 : 3.05% Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. Advisor Class shares are offered only to certain eligible investors as stated in the prospectus. They are offered without sales charges or Rule 12b-1 fees. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. Calendar Year Returns (%) Advisor Class S&P 500 Utilities Index S&P 500 Index All holdings are subject to change. Holdings of the same issuers have been combined. 2. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. 4. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 5. Periods shorter than one year are shown as cumulative total returns. 6. The fund s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal the fund s actual income distribution rate, which reflects the fund s past dividends paid to shareholders. Not FDIC Insured May Lose Value No Bank Guarantee

2 Portfolio Manager Insight 7 Performance Review QUARTERLY KEY PERFORMANCE DRIVERS Stocks Industries PG&E (Underweight) Electric Utilities (Stock Selection) HELPED OGE Energy (Off-Benchmark Exposure) Water Utilities (Overweight) Evergy (Overweight) The Williams Companies (Off-Benchmark Exposure) Oil, Gas and Consumable Fuels (Off-Benchmark Exposure to the Energy Sector) HURT Duke Energy (Significant Underweight) Multi-Utilities (Stock Selection) Kinder Morgan (Off-Benchmark Exposure) Independent Power and Renewable Electricity Producers (Lack of Exposure) PG&E might have been the fund s top contributor relative to the benchmark index, but it was a major detractor in the absolute, along with Edison International. Both companies operate in California, and both saw their stock prices plummet after an outbreak of devastating wildfires, some of which may have been sparked by utility equipment malfunctions. Though the causes were still under investigation at year-end 2018, PG&E faced the biggest potential liability risk of the two utilities the deadliest and largest fire began just after PG&E had a power failure on a nearby transmission line, and the cost of the damage would likely exceed PG&E s insurance coverage. Key contributor and Arizona-based electric utility Pinnacle West enjoyed a solid rally as its share value increased by more than six times the benchmark index s result. Pinnacle has been the recipient of positive industry analyst sentiments in the form of upgraded medium-term profit growth expectations and buy recommendations. Moreover, its board of directors recently voted to raise the company s dividend by 6.1%, or 17 cents per common share annually; this action results in an indicated annual dividend of $2.95 per share. All of our energy sector holdings (including key detractors Williams and Kinder Morgan), which remained focused on pipeline and energy-grid infrastructure companies, shed considerable value and were the major point of weakness versus the benchmark index. Despite strong quarterly earnings reports from most energy firms, energy-related equities were impacted by the negative momentum tied to shifting commodity fundamentals: Pressured in part by signs of rising US supply and fears of slowing global demand growth, crude oil prices suffered a swift decline of roughly 40% from early October s multi-year peak levels, likely exacerbated by hedge funds and speculators unwinding long positions they had built up for much of the year. Outlook & Strategy By the end of 2018, we believe many investors seemed to realize that the long-term earnings and dividend growth potential for utilities remained on track, given supportive regulatory policies across most US states. In general, we think earnings and dividend growth for utilities seem to be safely locked in a band of around 4% 6% over the next five or six years. In our view, macroeconomic factors will likely continue to drive the performance of utilities stocks. Demand for utilities services such as electricity and natural gas appears to be relatively insensitive to changes in price or income. In addition, the global trade issues dominating the news on a weekly basis over the past year have not negatively affected US utilities for the most part. We think the earnings predictability for utilities companies remains relatively sound heading into According to our analysis, the valuations of utilities companies are neither cheap nor overly expensive from a historical perspective. So, we do not anticipate any share-price movement occurring based on valuations alone. Interest-rate sensitivity remains a key influence on utilities stock returns, just as we saw throughout However, we are encouraged by the high level of engagement between utility companies and their regulators to ensure that fair returns on capital are produced for the sector s ever-increasing infrastructure investment needs. In our view, the sector appears to be better positioned today than it has been in recent memory to changing economic conditions, which could potentially help utilities adapt more quickly to a challenging inflationary environment if one were to occur. The fund continues to seek the best opportunities within the regulated environments that utilities operate. A highly constructive regulatory environment can provide for steady, long-term investment growth that exceeds industry averages while also producing returns on capital that exceed the regulatory allowed amounts. We maintain a small weighting in energy-related companies that transport oil and natural gas across extensive North American geographies. While these holdings have historically exhibited greater share price volatility than traditional utilities securities, especially as commodity prices move up and down, we believe there is fundamental upside to the portfolio by holding these securities. According to our analysis, the valuation of existing pipeline capacity will continue to price higher as new capacity additions face permitting challenges, leading to steady long-term utility-like returns for our pipeline owners. 7. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund s portfolio selection process. Holdings are subject to change. franklintempleton.com 2

3 Portfolio Characteristics 8,9,10 Portfolio Market Capitalization (Millions in USD) 30,157 36,234 Return on Equity 10.49% 10.74% 3-Year Sales Growth 0.43% -0.21% Estimated 3-5 Yr EPS Growth 6.81% 8.23% Price to Earnings (12 Month Forward) 17.88x 17.01x Portfolio Diversification Top Ten Holdings 11 Top Holdings % NEXTERA ENERGY INC 8.35 DOMINION ENERGY INC 5.24 EXELON CORP 5.20 AMERICAN ELECTRIC POWER CO 4.96 INC DUKE ENERGY CORP 4.82 SEMPRA ENERGY 4.35 CMS ENERGY CORP 4.34 EVERGY INC 4.16 XCEL ENERGY INC 3.96 ENTERGY CORP 3.16 Sector Weightings vs. 12,13 Percent of Total Electric Utilities Multi-Utilities Oil & Gas Storage & Transportation Water Utilities Gas Utilities Fixed Income Independent Power Producers & E % 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% Franklin Utilities Fund 8. The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Due to data limitations all equity holdings are assumed to be the primary equity issue (usually the ordinary or common shares) of each security s issuing company. This methodology may cause small differences between the portfolio s reported characteristics and the portfolio s actual characteristics. In practice, Franklin Templeton s portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Source: Factset. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 9. Source: FactSet. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. 10,13. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 11. Holdings of the same issuers have been combined. Top ten holdings information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. The information provided is not a recommendation to purchase, sell, or hold any particular security. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. 12. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. franklintempleton.com 3

4 Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Standard Deviation (%) Tracking Error (%) Information Ratio Beta Sharpe Ratio Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. 10-Year Risk vs. Return 16,17 Franklin Utilities Fund vs. Return (%) Risk (Standard Deviation) (%) Franklin Utilities Fund Investment Philosophy & Process Investment Team Portfolio Manager Years with Firm Years Experience John Kohli, CFA, Portfolio Manager/Research Analyst Blair Schmicker, CFA, Portfolio Manager/Research Analyst Beta, Information Ratio and Tracking Error information are measured against the. 15. Information Ratio is a way to evaluate a manager s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This measure is calculated by dividing the portfolio s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences between the portfolio return and the benchmark return over time). 16. Risk is measured by the annualized standard deviation of monthly total returns. Performance of the fund does not include sales charges (if applicable), but it does include dividends and capital gains reinvested at net asset value. 17. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. franklintempleton.com 4

5 Glossary Beta: A measure of the magnitude of a portfolio s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. Estimated 3-5 Year EPS Growth: An estimated measure of the growth of earnings per share over a forward-looking period. For a portfolio, the value represents a weighted average of the stocks it holds. Historical 3 Yr Sales Growth: The rate at which sales have increased for the fund s underlying holdings over the last three years. Information Ratio: In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager s performance against a benchmark. This measure explicitly relates the degree by which an investment has beaten the benchmark to the consistency by which the investment has beaten the benchmark. Market Capitalization: A determination of a company s value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Market capitalization is expressed in millions of USD. Price to Earnings (12-mo Forward): A measure of the price to earnings ratio (P/E) using the forecasted earnings for the next 12 months. Return on Equity: A measure of a corporation s profitability that reveals how much profit a company generates with the money shareholders have invested. For a portfolio, the value represents a weighted average of the stocks it holds. Sharpe Ratio: To calculate a Sharpe ratio, an asset s excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset s standard deviation. Standard Deviation: A measure of the degree to which returns vary from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a product compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment is managed, the smaller the tracking error. franklintempleton.com 5

6 What Are The Risks? All investments involve risks, including possible loss of principal. Investing in a fund concentrating in the utilities sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Stocks historically have outperformed other asset classes over the long term, but tend to fluctuate more dramatically over the short term. Securities issued by utility companies have been historically sensitive to interest rate changes. When interest rates fall, utility securities prices, and thus a utilities fund s share price, tend to rise; when interest rates rise, their prices generally fall. These and other risks are described more fully in the fund s prospectus. Important Legal Information Investors should carefully consider a fund s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/ or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Standard & Poor s, S&P and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC. S&P does not sponsor, endorse, sell or promote and S&P index-based product. Important data provider notices and terms available at: 3. Effective 12/31/1996, the fund began offering Advisor Class Shares. For periods prior to the fund s Advisor Class inception date, a restated figure is used based on the fund s oldest share class, Class A1 performance, excluding the effect of Class A1 s maximum initial sales charge but reflecting the effect of the Class A1 Rule 12b-1 fees; and b) for periods after the fund s Advisor Class inception date, actual Advisor Class performance is used, reflecting all charges and fees applicable to that class. Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2019 Franklin Templeton Investments. All rights reserved. 607 PP 12/18